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Disclosure of Taxpayer Information

Return preparers now subject to new regulations.

April 2008
by Alistair Nevius/The Tax Adviser

Section 7216 of the Internal Revenue Code imposes criminal penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or unauthorized uses of information furnished to them in connection with the preparation of an income tax return. Newly finalized regulations should prompt all return preparers to evaluate their processes to ensure that they conform to the new requirements (TD 9375).

The final regulations are the first update since 1974 to the rules governing preparer disclosure and privacy requirements. As many CPAs are aware, tax return preparers will have until Jan. 1, 2009, to implement the new requirements.

The new rules affect only return preparers; they do not affect the strict rules governing how the IRS handles taxpayer information.

Return Information

The regulations provide a new definition of tax return information subject to the disclosure and use restrictions. This includes information that:

  • The preparer derives or generates from tax return information in connection with preparation of a return;

  • The preparer receives from the IRS in connection with processing returns; or

  • Is a statistical compilation of tax return information, even in a form that cannot be associated with, or otherwise identified with, a particular taxpayer.

Information furnished by the taxpayer for purposes of engaging a tax preparer to prepare a tax return is also considered return information and is therefore subject to the new rules. See Treas. Reg. § 301.7216-1(b)(3).

Disclosure Consent

Under the new rules, preparers generally must obtain taxpayer consent, either by paper or electronically depending on how the return is being filed, before tax return information can be disclosed to any third party or used for any purpose other than filing the return. Such consent must identify the intended purpose of the disclosure, identify the recipients, and describe the particular authorized disclosure or use of the information.

The regulations include mandatory language that must be included in the consent informing individual taxpayers that (1) they are not required to sign the consent; (2) if they sign the consent, federal law may not protect their information from further disclosure; and (3) if they sign the consent, they can set the duration of that consent. If taxpayers fail to set a time period, the consent is valid for a maximum of one year.

To protect taxpayers from being pressured with repeated ­consent requests regarding the same issue, if a taxpayer declines to provide consent for an unrelated tax preparation disclosure or use request, the preparer cannot make a ­similar consent request.

Finally, preparers must obtain consent from taxpayers before sending tax information to another preparer outside the United States. This is to ensure that taxpayers know when their returns are being sent offshore for preparation. In such cases, the regulations require that the taxpayer's Social Security number be redacted.

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Alistair M. Nevius, is editor-in-chief of The Tax Adviser.